Corporate Board Members Should Face Consequences

We should start by asking whether shareholders should indeed come first. And if so, which shareholders? Corporations are creatures of the state and can have interests beyond shareholders, like employees and the community. Shareholders’ interests might differ, pushing the company into short-term decisions that are not in societies’ or even the corporation’s best interests. At best, we can say that directors should in some manner act in the long-term best interests of shareholders.

If you are in charge and your company does not do well, neither should you. Companies could claw back pay if directors make extremely reckless decisions.

Regardless of whether they are primarily representing shareholders, directors need to be held responsible for each decision, if not liable. As it stands, directors are effectively immune from paying out of their own pocket for any successful civil suit arising from even the poorest and most reckless of decisions. Criminal prosecutions are as rare as unicorns. Yet every kindergartner knows that without consequences, people are unlikely to act with appropriate care and deliberation.

This does not mean that directors should be criminally or even civilly liable in most circumstances. Frankly, in billion-dollar companies, such a threat would paralyze directors. They would be afraid any decision would mean personal bankruptcy. But certainly we should make directors more responsible by imposing consequences if their company performs spectacularly badly or if the directors make extremely foolish or reckless decisions. This could take the form of salary clawbacks, which draw on another kindergarten-level principle: If you are in charge and your company does not do well, neither should you.

Another way in which directors can be held responsible is for other companies to consider their track records. If Company A implodes, Company B should not hire or rehire any of Company A’s directors for its board. This is not the case today. Even a former director of Bear Stearns, which collapsed in 2008, was subsequently hired to be a Citigroup director. Until we hold directors to the same standards we hold ourselves – if you fail, you are penalized – directors will not care appropriately about their companies, let alone shareholders. It’s that simple.